Southwest Airlines (LUV.US) cuts profit guidance for 2026: fuel costs rise, but record revenue and strong demand in Q3 support profit resilience

The Zhitong Finance App learned that Southwest Airlines (LUV.US) announced the results for the third quarter of 2026 after the market on October 21, and became the third major US airline this month to lower its profit forecast for the full year 2026 due to rising fuel prices. Despite significant increases in fuel costs, the company achieved record revenue in the third quarter, driving a sharp year-on-year expansion in profit margins; CEO Bob Jordan said that despite rising ticket prices, travelers continued to book and demand remained strong.

According to financial reports, Southwest Airlines' total revenue for the third quarter was US$8.4 billion, up 21.2% year on year, a historical record for the third quarter; net profit was US$270 million, with diluted earnings of $0.55 per share; after excluding special projects, adjusted net profit was US$328 million, with adjusted earnings per share of US$0.66, higher than the LSEG consensus estimate of US$0.58. Adjusted revenue of $8.42 billion was also higher than market expectations of $8.25 billion. In terms of profitability, the company's operating margin was 4.5%, an increase of 4.0 percentage points over the previous year; the adjusted operating profit margin reached 5.4%, an increase of 4.8 percentage points over the previous year. Unit revenue (RASM) surged 21.6% year over year, the highest level in the company's history, and surpassed previous guidance with a slight decrease of 0.4% year over year in capacity.

Cost-side pressure mainly comes from fuel. Operating expenses for the third quarter were US$8 billion, up 16.3% year on year, up 15.4% after excluding special projects; unit cost excluding fuel, special projects and profit sharing (CASM-X) increased 3.4% year over year. The average fuel price for the quarter reached $3.92 per gallon, higher than the previous assumption of $3.70 to $3.75. Fuel spending increased by $821 million year over year, dragging down adjusted earnings per share by about $1.08.

Based on rising fuel costs, Southwest Airlines expects adjusted earnings of $2.60 to $2.85 per share in 2026, lower than the July forecast of $3.25 to $4.25. The company expects adjusted earnings per share for the fourth quarter to be 0.55 to 0.80 US dollars, capacity up 3% to 4% year on year, unit revenue up 19% to 21% year over year, and unit costs excluding fuel and other items to increase 4.0% to 4.5% year over year, including about 1.0 percentage point headwind caused by the 737-700 removing 6 seats and installing more spacious seats; fuel costs for the fourth quarter are expected to be around $4.55 per gallon. Looking at the full year, the company expects net capital expenditure of 2.5 billion to 2.75 billion US dollars, an increase in annual capacity of about 1.2%, down from the previous guideline of about 1.5%; it is expected to receive 67 Boeing 737-8/737-7 aircraft and decommission about 60 aircraft throughout the year.

On the demand side, Jordan said in the financial report that customers responded positively to the upgraded Southwest Airlines products, which is directly reflected in the performance; after digesting baggage fees and other commercial initiatives launched last year, demand is still strong, confirming the sustainability of the company's built profitability, even in the face of sharp increases in fuel costs. In the third quarter, the average ticket price for Southwest Airlines was US$231.69, up nearly 27% from the same period in 2025. This figure did not include surcharges; the number of passengers revenue fell 3.2% to 33.47 million passengers. In recent years, Southwest Airlines has continued to reshape its long-term business model, abolished old policies such as two free checked bags per person and open seat selection, and began charging many seat allocations and increasing baggage fees to move closer to major competitors.

In terms of balance sheet, as of the end of the quarter, the company's liquidity was US$5.6 billion, including US$3.6 billion in cash and equivalents and US$2 billion in revolving credit lines; the gross leverage ratio was 1.9 times, and the net value of unsecured aircraft and related assets was approximately US$15.8 billion. In the third quarter, the company paid out dividends of US$176 million, leaving an amount of US$450 million under the US$2 billion share repurchase authorization. The fleet size at the end of the quarter was 803 aircraft. In the quarter, 20 Boeing 737-8s were received, and 20 were decommissioned and sold. The related sales revenue was approximately US$214 million.

At a strategic level, this quarter, Southwest Airlines announced the launch of the company's first airport lounge network, Southwest Icon Lounge™, which is expected to welcome guests in 2027; upgraded the Rapid Rewards loyalty program to add Platinum membership levels; became the first airline in the US to connect to ChatGPT to provide a ticket search function; and added TAP as the 10th and 11th international partners. Starlink's onboard WiFi modifications continue to advance, and it is expected that full fleet coverage will be completed in the fall of 2027. Jordan said that with the completion of the transformation, the company's focus has shifted to business optimization and the next batch of customer experience upgrades to begin the next stage of value creation. “We are confident that we will further increase profits, improve returns, and expand profit margins.” The company also announced that it will host Capital Markets Day in New York on March 2, 2027. At that time, it will announce the multi-year financial framework and management goals.

At the industry level, Delta and United Airlines also lowered their full-year profit forecasts when announcing third-quarter results, and both companies' third-quarter revenue and profit fell short of expectations. In contrast, Southwest Airlines' third-quarter revenue and adjusted earnings per share both exceeded expectations, but rising fuel costs still put significant pressure on its full-year profit guidance.